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MARGER & AQUISATION

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MARGER & AQUISATION PPT FOR FINANCEMBA 3 SEM

MARGER & AQUISATION PPT FOR FINANCEMBA 3 SEM

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MARGER & AQUISATION MARGER & AQUISATION Presentation Transcript

  • Workshop on Mergers & Acquisitions February 17, 2005 presented by BABASAB PATIL
  • Why M&A?
    • Underlying Principle for
    • M&A Transactions
    • 2 + 2 ≠ 4
    • Additional Value of “ Synergy ”
  • Why M&A?
    • Market Intensification:
        • Horizontal Integration – Buying a competitor
          • Acquisition of equity stake in IBP by IOC
          • AT&T merger into SBC enables the latter to access the corporate customer base and exploit the predictable cash flows typical of this telephony section
        • Market Extensions – New markets for Present products
          • Maersk – Pipavav : strategic objective of investing in a container terminal in the west coast
          • Bharat Forge’s acquisition of CDP (Germany)
          • S&P’s proposed acquisition of CRISIL
  • Why M&A?
    • Vertical Integration : Internalization of crucial forward or backward activities
      • Vertical Forward Integration – Buying a customer
          • Indian Rayon’s acquisition of Madura Garments along with brand rights
      • Vertical Backward Integration – Buying a supplier
          • IBM’s acquisition of Daksh
  • Why M&A?
    • Diversification: Overcome Barriers to Entry
      • Product Extension : New product in Present territory
          • P&G acquires Gillette to expand its product offering in the household sector and smooth out fluctuations in earning
      • Free-form Diversification : New product & New territories
          • Flight Centre’s proposed acquisition of Friends Globe
          • Indian Rayon’s acquisition of PSI Data Systems
  • Why M&A?
      • Advantages:
        • Greater Economic Clout:
          • Proposed merger of Petroleum PSUs
          • P&G merger with Gillette expected to correct balance of power between suppliers and retailers.
        • Economies of scale and Sharing Overheads: Size really does matter
          • IOC & IBP
        • Synthesized capabilities
          • Proposed merger of nationalized banks
  • M&A Different Perspectives
    • Acquirer
      • Majority/ Strategic Partner
      • Minority/ Private Equity Investor
    • Target Company
  • M&A TRANSACTION ISSUES: TARGET
    • Due Diligence – Full Disclosures
      • Linked with Reps & Warranties
      • Reps should be negative
      • DD in case of Listed Company
      • Post Closing Adjustment
    • Condition Precedents – Definitive
      • Include as Exhibits
    • Survival of Reps for limited period
  • M&A TRANSACTION ISSUES: ACQUIRER
    • Due Diligence – Risk Matrix and Value Depletor
      • Material Contracts
        • Any subsisting contracts granting similar or superior rights to other investors
        • Termination rights of major customers
        • Approval rights of financiers
      • Title to Properties & Assets: esp. where main business is situated
      • Statutory Dues
      • Litigation : Contingent Liabilities
      • IPR protection
      • Tax Compliance (Settlement Commission)
  • M&A TRANSACTION ISSUES: ACQUIRER
    • Mode of Acquisition
      • Pure Equity (Existing or New); Equity & Preference; Special Class (Differential voting rights, dividends or otherwise)
      • Leveraged Acquisitions
    • Corporate Governance
      • Related Party Transactions (past & going forward)
    • Board Representation
      • Quorum (Inclusive)
      • Fiduciary Responsibility of Board v. Shareholders
  • M&A TRANSACTION ISSUES: ACQUIRER
    • Deadlock Resolution
      • Majority/ Strategic Partner
      • Lenders
    • Return on Investment
      • Cap on dividends to preference shares
      • Liquidation Preference
    • Lock - in of Promoters
      • Enforceability of transferability restrictions
  • M&A TRANSACTION ISSUES: ACQUIRER
    • Non - Compete/ Non - Solicitation
      • Payment for Goodwill to exiting partner
    • Exclusivity
    • Enforceability against Company
      • Company as party to SHA
    • Exit Options
      • Listing (Private Equity)
      • Call/ Put Option
  • M&A TRANSACTION ISSUES: GENERAL
    • Effectiveness of SHA and SPA
    • Indemnity
      • Aggregate Liability Cap
      • De Minimis
      • Threshold
    • Participative Rights v. Protective Rights
      • Strategic Partner : Participative Rights
        • Control on Board
        • Sharing Control
      • Private Equity : Protective Rights
  • M&A TRANSACTION ISSUES: GENERAL
    • Special Rights
      • Tag – Along Rights: minority partner/ private equity
      • Drag - Along Rights: majority partner
      • Right to share the upside on revised valuation of Target eg: on Merger; Listing at higher valuation
      • Right of First Refusal
    • Earn-out Structure
      • Favorable Business Projections
  • M&A TRANSACTION ISSUES: GENERAL
    • FCPA
    • Arbitration v. Litigation: Effective Remedy
      • Proper Law of Arbitration
      • ICC v. UNICITRAL
      • Group Companies Doctrine
      • Place of Arbitration
      • Cost Effective
  • M&A REGULATORY FRAMEWORK
    • TRANSACTION STRUCTURE
    • Companies Act
    • Income Tax Act
    • Stamp Acts
    • Competition Act
    • TRANS-BORDER TRANSACTIONS
    • Foreign Exchange Management Act
    • LISTED COMPANIES
    • SEBI Regulations
    • Stock Exchange – Listing Agreement
  • M&A OVERVIEW
    • Mergers Spin Offs Acquisitions
    DEMERGER OTHERS ASSETS SHARES CONTROL SLUMP SALE
  • ACQUISITIONS
    • Acquisition
      • Shares
      • Control
    • Acquisition of Assets
      • Slump Sale
  • Acquisitions ISSUES: COMPANIES ACT
    • Sections 108A to G : Central Government approval if in excess of threshold prescribed
      • ambiguity as to ‘ classification of goods ’
    • Section 372A : Compliance by transferee company in acquisition of shares
    • Section 77A : Buy Back may be used as a defense to a hostile takeover
      • Used in U.S.: PeopleSoft’s attempt to thwart Oracle
  • Acquisitions ISSUES: FEMA
    • Acquirer - Non-Resident:
    • No approval required for purchase of shares (including existing shares)
      • From R
      • From NR
    • Valuation prescribed in case of R-NR not less than
      • Ruling Market Price - Listed Target Company
      • Fair valuation by a CA as per CCI guidelines - Unlisted Target Company
    • Press Note 18 replaced by Press Note 1 of 2005
    • Investment has to comply with FDI policy
  • Acquisitions ISSUES: FEMA
    • Target Company is a Non-Resident
      • Direct investment in JV/ WOS outside India (other than financial services) requires no approval subject to conditions including inter alia
        • Financial commitment < or = 100% networth
        • Investment by way of remittance only if valuation
          • If > 5 million USD: by Merchant Banker/ Investment Banker registered with SEBI/ appropriate authorities
          • Other cases: by CA/ CPA
        • Investment by share swap: valuation by Merchant Banker/ Investment Banker registered with SEBI/ appropriate authorities
  • Acquisitions ISSUES: TAKEOVER CODE
    • Definition of “Control” - Inclusive
      • Ambiguous:
        • TATA Sellout in ACC.
      • Negative control?
    • S. 25(2) prohibits public offers after 21 days of the public announcement of first public offer
    • In case of indirect acquisition, foreign acquirer has three months from completion of transaction to make open offer. Therefore, foreign transactions can be concluded prior to open offer in India.
  • Acquisitions RECENT CHANGES : TAKEOVER CODE
    • New thresholds of 54% and 74% in Regulation 7
    • 55% shares cannot be allotted by preferential allotment or market purchase – consolidation by public offer only
    • Acquisition by public offer under 11(2) can be for only so many shares as will keep float above listing requirements.
    • Where any acquisition reduces public float below Listing Agreement requirements, acquisition to comply with delisting guidelines
    • Where Code is triggered by a global deal, if the public offer will lower float to below the listing requirement, then acquirer has 12 months to raise float either by fresh issue or by disinvestment.
  • Acquisitions ISSUES: MISC
    • Stamp Duty
      • No stamp duty if transferred shares are dematerialized
    • Industrial Disputes Act (s. 25FF)
      • Workmen employed by transferor company entitled to retrenchment benefits unless retained in employment on same terms.
  • Mergers
    • Mergers
    • Spin-offs
      • Demergers
  • Mergers STRUCTURE 1
    • A = Amalgamating Company: Ceases to Exist
    • B = Amalgamated Company
    • B receives all of A’s assets and liabilities
    • Shareholders of A receive shares in B and maybe other benefits like debentures, cash
    • Transfer assets and liabilities
    A B
  • Mergers STRUCTURE 2
    • A, B and C = Amalgamating Companies: Cease to exist
    • D = Amalgamated Company: may or may not have existed before Merger
    • All assets and liabilities of A, B and C transferred to D
    • Shareholders in A,B and C get shares in D.
    A D B C
  • Spin-Offs STRUCTURE Y X Y Transfer of undertaking Y Company B Company A
    • Consideration is usually shares of Company B but
    • maybe cash.
    • Process may or may not be Court sanctioned.
      • Salora spinning off Panasonic to Matsushita under s. 391 Scheme. Consideration in cash.
    Consideration in cash or issue of shares
  • Demergers STRUCTURE
    • Demergers are one type of spin-offs: under s. 391
    • A = Demerging Company
    • B = Resulting Company: may or may not have existed earlier
    • A transfers undertaking to B
    • B issues shares to shareholders of A
    X Y Y Company B Company A Transfers undertaking Y Shareholders of A Issues shares
  • Merger & Demerger PROCESS
    • Phase- I
    • Draft Scheme
    • Notice to members of Board of both companies
    • Determine swap ratio based on valuation report
    • Board approval of both companies
    • Prior NoCs from secured creditors and shareholders for exemption from meeting: Reduce Time and Costs
      • In ICICI Ltd. merger with ICICI Bank, meeting of preference shareholders of ICICI Ltd. was dispensed with since sole preference shareholder furnished an NOC
    • Phase- II
    • Draft Application under s. 391(1)
    • Application to HCs in respective jurisdictions of both companies for sanction / direction to conduct meetings
      • Moving registered office to one jurisdiction: Reduce Time and Costs
  • Merger & Demerger PROCESS
    • Phase- III
    • Notice of EGM to members with statement of terms of merger, interests of directors and proxy forms: 21 days
    • Advertisement
    • Notice in 2 newspapers: 21 days
    • Affidavit certifying compliance with HC’s directions in respect of notice/ advertisement
    • Meetings of creditors and/ or shareholders: agreed to by majority in number representing ¾ of value present and voting
    • Chairman of meetings to file report within 7 days of meeting
    • Resolutions and Explanatory Statements to be filed with RoC
  • Merger & Demerger PROCESS
    • Phase- IV (Approval of the Scheme)
    • HC to be moved within 7 days of Chairman’s Report for second motion petition
    • 10 days notice of hearing of petition in same newspapers
    • Notice to Central Govt. (Regional Director), and OL (if applicable): Submit reports
    • Objections raised in 391 proceedings
    • HC Sanction
    • Certified copy of HC Order to be filed with RoC within 30 days of order.
  • Merger & Demerger ISSUES: COMPANIES ACT
    • s 391 - 394 : “Complete Code”, “Single Window Clearance”
      • Reduction of capital- Position unclear, Predominance of judicial view: substantial compliance with s. 100- 102 required.
    • Transnational Mergers : 391 - 394 mechanism operates only where amalgamated company is Indian. E.g. of transnational merger concluded under 391 route - Bank of Muscat merging into Centurion Bank by order of Karnataka HC
    • Alternative Mechanism: S. 494
      • Through Liquidation Process
      • Liquidator transfers assets to foreign company for shares
      • Process has to be “altogether voluntary”
      • Tax benefits are unavailable under this route
  • Other Spin-Offs ISSUES: COMPANIES ACT
    • Where spin-offs are outside the 391 mechanism, the following compliances need to be ensured
      • 293(1)(a) resolution
      • Voting has to be by postal ballot in a public listed company
  • Mergers and Demergers ISSUES: INCOME TAX
    • Transfer of capital assets by amalgamating company to amalgamated company is exempt from Capital Gains Tax provided amalgamated company is an Indian company
    • Capital Gains Exemption in respect of shares issued to members of amalgamating/ demerging company- s. 47
    • Exemption may not be available if members of amalgamating company receive anything besides shares in the amalgamated company like debentures or cash- Gujarat HC in Gautam Sarabhai v. CIT , 173 ITR 216.
  • Mergers and Demergers ISSUES: INCOME TAX
    • In case of fraction shares, issue to trustee who liquidates these and distributes money to shareholders of amalgamating company.
    • Carry forward of losses and unabsorbed depreciation provided the amalgamated company carry on the business of the amalgamating company for at least 5 years – s. 72A
      • Use of Reverse merger to meet above condition
    • Spin-off receives tax benefits under Income Tax Act only if it is a demerger
  • Slump Sale ISSUES: TAXATION
    • Slump Sale = Transfer of undertaking without itemizing individual assets and liabilities- s.2(42C) Income Tax Act
    • Treated as capital gains
    • If undertaking is older than 3 years, long term capital gains rates apply even if individual assets are new
    • Carry forward of losses and unabsorbed depreciation unavailable
  • Merger & Demergers ISSUES: SALES TAX
    • No Sales tax on Amalgamation or demerger.
    • Where effective date is retrospective, any transfers between amalgamating company and amalgamated company retrospectively cease to be liable to sales tax- Mad HC Castrol Oil v. State of TN , 114 STC 468
    • Some Sales Tax enactments contain specific provisions to tax such transactions eg. S.33C, Bombay Sales Tax Act. No such provision in Central Sales Tax Act.
  • Merger ISSUES: STAMP DUTY
    • Divergences between states: Shopping for beneficial rates usually pointless
    • Duty to be imposed on value of shares transferred not on individual assets transferred: Bom HC in Li Taka AIR 1997 Bom 7
    • States with Specific entries: Maharashtra, Karnataka, Rajasthan and Gujarat
  • Merger ISSUES: STAMP DUTY
    • States without specific entries: Unclear if duty leviable.
      • Cal HC in Madhu Intra Ltd. v. ROC, 2004 (3) CHN 607 - 394 Order is not an instrument chargeable to duty
      • Supreme Court in Ruby Sales v . State of Maharashtra (1994) 1 SCC 531 - specific inclusion of civil court decrees in Bombay Stamp Act only abundant caution
    • 1937 Notification under Indian Stamp Act, 1899 remits duty when merger is of a 90% subsidiary: Remission not available in states with own legislations eg. Kerala, Karnataka, Maharashtra, Gujarat and Rajasthan
    • Gujarat and Maharashtra have limits on stamp duty for mergers and demergers at Rs.10 crore and Rs. 25 crore.
  • Merger ISSUES: SEBI
    • Acquisition of shares pursuant to a scheme of arrangement or reconstruction under any law, Indian or foreign – exempt from SEBI Takeover Code.
      • Exemption claimed unsuccessfully by Luxottica in the acquisition of Ray Ban Sun Optics India
    • Listing Agreement:
      • Scheme before the Court/ Tribunal must not violate, override or circumscribe the securities laws or stock exchange requirements
      • Disclosure required
  • Merger ISSUES: SEBI
    • Shares allotted by unlisted transferee company to shareholders of listed transferor company under a HC sanctioned scheme – can be listed without an IPO subject to conditions (DIP).
      • Eg. Dabur Pharmaceuticals
    • Constitutes ‘Price Sensitive Information’ in terms of Insider Trading Regulations.
    • Compliance with Delisting Guidelines if public shareholding below prescribed limit.
  • Mergers MISCELLANEOUS ISSUES
    • Foreign Exchange Management Act, 1999
      • Where the amalgamated company is Indian, non resident shareholders of the foreign amalgamating company require RBI approval to receive shares.
      • Where the amalgamated company is foreign, the issue of its shares to Indian shareholders requires RBI approval.
      • Automatic route available where non residents have to be issued shares in a merger of Indian companies.
  • Mergers MISCELLANEOUS ISSUES
    • Human Resources
      • Workmen entitled to retrenchment benefits unless retained in employment on same terms.
      • Adjustments of pay scale needs to be resolved.
        • Global Trust employees were retained on same terms in OBC. Pay packages of former GTB staff could be altered only after 3 years. OBC management had to contend with GTB’s complex salary structure.
  • Mergers & Acquisitions COMPETITION LAW
    • Monopolistic and Restrictive Trade Practices Act, 1969
      • Status: Repealing provision in Competition Act, 2002 not notified.
      • No Central Government approval required for a merger or acquisition under the MRTPA
      • Act attracted only if amalgamated company discovered to be monopolistic in its working not at stage of amalgamation- Hindustan Lever, 1995 Supp (1) SCC 499
  • Mergers & Acquisitions COMPETITION LAW
    • Competition Act, 2002 (Partially notified)
      • Merger or Acquisition = “Combination” if stipulated thresholds respecting aggregate asset or turnover are exceeded
      • Prior approval of combination is not mandatory
      • Test – “ Cause or likely to cause an appreciable adverse effect on competition within the relevant market ”